The Schedule NEC (Form 1040-NR, Non-ECI Taxable Income)

The Schedule NEC (Form 1040-NR, Non-ECI Taxable Income)

Schedule NEC, Form 1040-NR

For taxpayers who are categorized by the IRS as non-residents but still have US-sourced income, they may have to file an annual Form 1040-NR tax return — which is the Form 1040 for Non-Resident Aliens, and it may also include Schedule NEC. While the tax return may appear similar to the regular Form 1040, it is significantly different when it comes to the tax implications of certain types and categories of income.  While the Schedule NEC (Non-Effectively Connected Income) can be relatively complicated, let’s go through the basics of what type of information a non-resident alien would need to complete this portion of the form.

Non-ECI

The first important aspect of schedule NEC for the 10400-NR is that it is for non-resident aliens involving income that is not Effectively Connected Income (ECI) with a US trade or business. In other words, the category of filer who may have to file this form would be a Non-Resident with non-ECI income. Typically, for nonresident aliens, income that is non-ECI is considered FDAP (Fixed, Determinable, Annual, and Periodic).

Types of Income

There are various different categories of income that are considered not effectively connected with a US trade or business. The items of income listed on the schedule NEC include the following:

• • • • Dividends and dividend equivalents:

        • Dividends paid by U.S. corporations

        • Dividends paid by foreign corporations

        • Dividend equivalent payments received with respect to section 871(m) transactions

      • Interest

        • Mortgage

        • Paid by foreign corporations

        • Other

      • Industrial royalties (patents, trademarks, etc.)

      • Motion picture or TV copyright royalties

      • Other royalties (copyrights, recording, publishing, etc.)

      • Real property income and natural resources royalties

      • Pensions and annuities

      • Social security benefits

      • Capital gain from line 18 below

      • Gambling winnings—Residents of countries other than Canada.

      • Other (specify)

Tax Rates

For each specific category of income, there are various columns associated with the different tax rates. Taxpayers must indicate which tax rate applies to each source of income. The tax rates will vary depending on whether it is a treaty country; noting, there are various rules and exceptions regarding the specific type of income for the specific country — and whether any treaty elections have been made.  In general, FDAP is taxed at 30% – but the tax rate might be reduced to 15%, 10%, or even 0% depending on the specific type of income, exceptions, and treaty elections made.

Capital Gains

It is very important that taxpayers review the rules involving capital gains when they are Non-Resident Aliens because the general rule is that capital gains are not taxable. There are certain exceptions, exclusions, and limitations, but in general, Capital Gains for Non-Resident Aliens are exempt from US Tax. Keeping that in mind, if it involves the sale of real estate or another real property interest, then generally that income is taxable and falls under a whole different set of rules involving FIRPTA and Schedule D.

As provided by the IRS:

• • • Lines 16 Through 18—Capital Gains and Losses From Sales or Exchanges of Property Include these gains only if you were in the United States at least 183 days during 2021.

    • They are not subject to U.S. tax if you were in the United States less than 183 days during the tax year.

    • In determining your net gain, do not use the capital loss carryover. Losses from sales or exchanges of capital assets in excess of similar gains are not allowed. Enter the amount from line 18 on line 9. If you had a gain or loss on disposing of a U.S. real property interest, see Dispositions of U.S. Real Property Interests, earlier.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax and specifically IRS offshore disclosure.

Contact our firm today for assistance.